Multiple choice

Under annuity basis goodwill is calculated by

  1. number of years purchased multiplied with average profits

  2. number of years purchased multiplied with super profits

  3. summation of the discounted multiplied with super profits

  4. super profit divided with expected rate of return
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Under annuity method, goodwill is calculated by discounting future super profits to present value. Summation of discounted super profits = present value of goodwill. Average profit method (option A) uses normal profits, not super profits. Options B and D don't involve discounting.

Keep practicing — related questions